Welltower (HCN) Tops Q3 FFO by 1c; Boosts FY16 Disposition Outlook
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Welltower (NYSE: HCN) reported Q3 FFO of $1.16, $0.01 better than the analyst estimate of $1.15. Revenue for the quarter came in at $1.08 billion versus the consensus estimate of $1.06 billion.
Welltower also announced it has increased its 2016 disposition guidance from $1.3 billion to $4.1 billion of proceeds in a strategic repositioning of its premier health care real estate portfolio. As detailed in the company’s third quarter 2016 Earnings Release and Supplement issued today, $832 million of total dispositions have closed as of September 30, 2016.
“This repositioning will strengthen our focus on premium private-pay health care real estate, reinforce our industry-leading balance sheet strength, and enhance our operating and financial performance,” said Tom DeRosa, CEO of Welltower.
The pro forma impact of these transactions are expected to achieve several strategic benefits:
- Significant increase in private pay revenue mix to 92.4% from 89.4%
- Reduce long-term/post-acute care concentration to 13.5% from 19.9%
- Improve long-term/post-acute care payment coverage after management fees to 1.45x from 1.34x
- Further deleverage the balance sheet with undepreciated book capitalization moving to 34.4% from 39.5% and strengthening credit metrics
We expect to execute on $3.3 billion of disposition proceeds in the fourth quarter, including $1.9 billion of long-term/post-acute care, $1.2 billion of seniors housing triple-net, $51 million of seniors housing operating and $150 million of loan payoffs. The total 2016 estimated disposition proceeds forecast includes approximately $1.7 billion of Genesis Healthcare, Inc. (NYSE: GEN) properties to be executed in three separate transactions where we have either closed or entered into definitive agreements. Two of the transactions representing $1.2 billion are sales to third parties. The third transaction is a joint venture between Welltower (25%) and a foreign institutional investor (75%) and includes a combination of Genesis and Brookdale Senior Living, Inc. (NYSE: BKD) properties. These proceeds include $75 million of notes payable issued from Genesis to Welltower. These notes represent consideration in exchange for the reduced rent and lower lease escalators to be paid by Genesis under the new leases with the buyers. The terms of the remaining Welltower master lease remain unchanged. The effective cap rate for the combined Genesis dispositions to Welltower is 9.0%.
In addition to the Genesis transactions described above, the company expects to realize value across other portfolios, capitalizing on the robust capital market conditions and increased domestic and foreign institutional investor interest in U.S. health care real estate. We anticipate approximately $1.6 billion of additional proceeds from other transactions now included in Welltower’s 2016 disposition guidance.
Pro forma for the transactions, our long-term/post-acute care exposure will decrease from 19.9% to 13.5% and our Genesis concentration will decrease from 13.8% to 7.1%. We will also achieve significant balance sheet deleveraging, improved credit metrics and increased financial flexibility.
The tables below show estimated fourth quarter disposition guidance followed by projected use of proceeds (dollars in millions). Amounts, yields and timing are estimates and subject to change.
|Disposition Proceeds||Estimated Amount||Effective Cap Rate(1)|
|Long-Term/Post-Acute Care (LT/PAC)||$||1,867||9.0||%|
|Seniors Housing Triple-Net (SH NNN)||1,206||6.3||%|
|Seniors Housing Operating (SHO)||51||5.8||%|
(1) Represents current annual cash NOI as a percentage of estimated proceeds.
|Use of Proceeds||Estimated Amount||Estimated Yield/Rate|
|4Q16 Development Funding||156||8.0||%|
|Line of Credit Payoff||1,350|
|2017 Senior Notes Payoff||450||4.7||%|
|Secured Debt Payoffs||668||5.4||%|
|Preferred Stock Redemption||288||6.5||%|
|Debt Extinguishments and Other Costs||48||n/a|
|* Rate as of 9/30/2016|
Pro Forma Portfolio Metrics:
The dispositions are expected to have a significant positive impact on our private pay mix, LT/PAC payment coverage and tenant concentration, as shown in the table below. Please see the accompanying exhibits for In-Place Net Operating Income (IPNOI) reconciliations. The pro forma metrics are based on current expectations for dispositions and uses of proceeds described above which are subject to change.
Total Private Pay Revenue Mix %
|LT/PAC Payment Coverage after management fee||1.34x||1.45x||0.11x|
|Genesis % of IPNOI||13.8||%||7.1||%||-6.7||%|
|LT/PAC % of IPNOI||19.9||%||13.5||%||-6.4||%|
Pro Forma Credit Metrics:
The dispositions are expected to significantly improve all credit metrics, as shown in the table below. Please see the accompanying exhibits for reconciliations. The pro forma metrics are based on current expectations for dispositions and uses of proceeds described above which are subject to change.
|Net Debt / Undepreciated Book Capitalization||39.5||%||34.4||%||-5.1||%|
|Net Debt / Enterprise Value||30.9||%||26.6||%||-4.3||%|
|Net Debt / Adjusted EBITDA||5.7x||5.1x||-0.6x|
|Secured Debt / Total Assets||11.1||%||9.4||%||-1.7||%|
|Adjusted Interest Coverage||4.3x||4.4x||0.1x|
|Adjusted Fixed Charge Coverage||3.4x||3.6x||0.2x|
|Available Liquidity (millions)(1)||$||2,106||$||3,456||$||1,350|
(1) Represents line of credit availability plus unrestricted cash and IRC section 1031 deposits.
Additional 2017 Genesis Dispositions
In addition to the transactions described above, the company has entered into a memorandum of understanding with Genesis to exit certain states that Genesis considers non-core due to lack of scale and other strategic reasons. We expect to receive approximately $120 million of proceeds from the sale of 14 properties we own in these states. Additionally, we have agreed to provide Genesis the option to buy back an additional $500 million of real estate in the first half of 2017.
Management expects to further discuss the transactions described in this release on its earnings call on November 2, 2016 at 10:00 a.m. Eastern Time. Investors and other interested parties may access the conference call in the following ways:
- At the company’s website: www.welltower.com. To participate in the webcast, please log on 15 minutes in advance of the scheduled call to download the necessary software. A webcast replay will be available approximately two hours after the conference call concludes and will be available for 90 days.
- By telephone: The telephone dial-in number in the U.S. is 888-346-2469. For participants outside the U.S., the dial-in number is 706-758-4923. The conference ID number is 94724138.
A replay of the conference call will be available beginning at approximately 1:00 p.m. on November 2, 2016, and ending on November 16, 2016. The replay dial-in number for U.S. participants is 855-859-2056. For participants outside the U.S., the replay dial-in number is 404-537-3406. The replay conference ID number is 94724138.
Welltower sees FY2016 FFO of $4.50-$4.56, versus prior guidance of $4.50-$4.60 and the consensus of $4.57.
For earnings history and earnings-related data on Welltower (HCN) click here.
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